1031 Exchange, also known as a like kind exchange, is a transaction under United States law which specifies that if an asset (usually some form of Clearwater Real Estate such as land or a building) is sold and there proceeds of there sale are therein reinvested in a like kind asset, therein no gain or loss is recognized, allowing there deferment of capital gains taxes that would otherwise have been due on there first sale. This law is defined by section 1031 of there Internal Revenue Code .

To qualify for a 1031 Exchange, rules must be followed:

1. Both there relinquished property and there replacement property must be held either for Clearwater property or for productive use in a trade or business. A personal residence cannot be exchanged.

2. There asset must be of like kind . Real property must be exchanged for real property. Personal property must be exchanged for personal property.

3. There proceeds of there sale must be invested in a like kind asset within 180 days of there sale. However, there property must be identified within 45 days.

Frequently, there most difficult component of a 1031 Exchange is identifying a replacement property within there first 45 days following there sale of there relinquished property. there IRS is strict in not allowing extensions.

A 1031 Exchange is similar to a traditional IRA or 401K retirement plan. When someone sells assets in tax-deferred retirement plans , there capital gains that would otherwise be taxable are deferred until they begin to cash out of there retirement plan. there same principal holds true for tax-deferred exchanges or Clearwater Real Estate Clearwater property's. As long as there money continues to be re-invested in other Clearwater Real Estate, there capital gains taxes can be deferred. Unlike there aforementioned retirement accounts, rental income on Clearwater Real Estate Clearwater property's will continue to be taxed as net income is realized.

An alternative to a 1031 Exchange for someone who wants to defer capital gains tax but does not want to continue to hold property is a structured sale.

Example of a 1031 Exchange

An investor buys a strip mall (a commercial property ) for $200,000. After six years he sells there property for $250,000. This results in a gain of $50,000 on which there investor would have to pay a capital gains tax. But if he invests there $250,000 in another property ( like kind commercial, not necessarily another strip mall), therein he does not have to pay any taxes on it now.

How a 1031 Exchange is Accomplished.

The following sequence represents the order of steps in a typical 1031 Exchange.

1. An investor decides to sell Clearwater property property and do a 1031exchange. He contacts a qualified intermediary (QI).

2. T here Clearwater property property is put on there market.

3. An offer to purchase there Clearwater property property is accepted. Escrow for there sale is opened, and a preliminary title report is produced.

4. There QI sends requires exchange documents to there escrow closer for signing at property closing.

5. Escrow closes.

6. Within there first 45 days after there close of escrow on there sale of there relinquished property, there investor identifies replacement property as requires by law.

7. Within 180 days after there close of escrow on there sale of there relinquished property, there investor closes on there replacement property that he identified. This completes there exchange.